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Banking on change

Many Lebanese believe that when the Syrians leave, the economy will boom. They are mistaken

by Michael Young

As demonstrations succeeded one another in the aftermath of former Prime Minister Rafik Hariri’s death, one contradiction became increasingly apparent: while the events were doing little good for the economy, the general feeling of euphoria prevailing seemed to overcome the prospect of an economic collapse, at least in the minds of those opposing the government.

This paradoxical confidence, which should have been undermined by the death of the only man with a chance of taking Lebanon out of what many consider inevitable bankruptcy, has endured. And yet the indicators are hardly reassuring. The tourism industry and real estate sales, both of which bolstered the relative recovery in the economy after 2001, have been on unprofitable standby. According to finance ministry officials, the state is losing some $15 million a day in lost VAT revenues. Every week that politics delay the smooth run of policy is one lost to introducing vital economic reform.

And yet the public mood, for the first time in many years, is positive, even if this is accompanied by concern. The complex ways of economic confidence have been difficult to gauge in postwar Lebanon. In the second half of the 1990s, the expanding debt prompted the World Bank to prepare for a catastrophe scenario in the event the pound collapsed. That didn’t happen, and Bank economists would come to Beirut shaking their heads, ensuring one and all that the financial edifice should have already fallen. Then Hariri pulled another rabbit out of his hat and managed to organize a Paris II conference. This was to his merit, but the funds were soon wasted thanks to government bickering. While there has been some pressure on the pound since Hariri’s death, as well as the removal of funds by Syrian investors, Lebanon for the moment remains within the range of acceptable economic uncertainty. A primary reason is that there is a widespread hope for tomorrow, one resting on the familiar myths long bolstering the Lebanese economy: that once the Syrians depart corruption will end and that large amounts of expatriate money will return, as will young Lebanese in search of new opportunities in their homeland. Like most myths, these have some truth in them, and much wishful thinking. Corruption may decline somewhat, but the Syrians were always part of a chain of larger corruption in Lebanon, as opposed to its main sponsors. Will Lebanese emigrants be tempted to invest more in the economy now that Syrian soldiers have gone? Perhaps, but that shouldn’t detract from the fact that there are relatively few profitable financial ventures existing today to draw the “massive” sums of money the optimists anticipate: the Beirut stock exchange is on life support; labor is relatively expensive when compared to surrounding states; and serious obstacles remain in manufacturing and agriculture.

More promising, perhaps, is the would-be return of young Lebanese, since that comes with an element of idealism that markets often fail to affect, at least in the short term. However, in the long term that idealism will fade if opportunities are short. Lest we forget, when Hariri came to power in late 1992 his presence and the prospect of regional peace encouraged many expatriates to fly home. By the end of the decade, however, many of the prodigal sons and daughters, armed with foreign nationalities from their time overseas, again departed from Lebanon because of the ambient stagnation. That could happen again if the society fails to seize the economic moment in the coming months.

Perhaps the most enduring promise held by the optimists is that, somehow, the Lebanese will benefit from outside help, particularly from the United States. There may be something there. Certainly, the Bush administration has shown an interest in using Lebanon as a showcase for peaceful democratic transition in the Middle East, to contrast with Iraq. While the focus on this appears to have been pressure on Syria to pull its soldiers out, there may be a second ingredient: ensuring that a newly-democratic Lebanon won’t collapse into a devastating pit of debt. And there, the Lebanese may have just found an ally.

The decision of President George W. Bush to name the number-two man at the Pentagon, Paul Wolfowitz, as his candidate for World Bank president was, perhaps, a lucky straw for the numbers crunchers in Beirut. Inasmuch as Wolfowitz is the administration official most wedded to reform in the Arab world, those seeking the Bank’s help in rescheduling Lebanon’s debt may find a willing partner – someone aware that economic resurrection must accompany political independence to make the latter more credible. That said, Wolfowitz’s reported affinity for the anti-corruption drive of his predecessor, James Wolfensohn, may put a damper on things for Lebanese bankers insisting on a sturdy defense of banking secrecy laws. Confidence may prevail in the coming months, delaying bankruptcy. But how much of that difficult-to-measure variable do the Lebanese really have after having expended an inordinate amount in the past decade?

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